BAIKONUR, Kazakhstan (Reuters) - From rocket-shaped playground equipment to faded murals of cosmonauts, mementos of the heyday of Soviet space exploration are scattered around this sandswept town that launched Yuri Gagarin into orbit in 1961.

When President Vladimir Putin described the space port on the remote Kazakh steppe as "physically aged" in April, he could have been speaking about Russia's space industry itself.

In Baikonur as elsewhere, the once-pioneering sector is struggling to live up to its legacy, end an embarrassing series of botched launches, modernize decaying infrastructure and bring in new blood and new ideas.

Putin hopes a sweeping reform he signed off on this month will not come too late to turn the industry around - part of a push to make Russia a high-technology superpower by salvaging leading Cold War-era industries and research centers.

Built far from prying eyes in a desert-like flatland in central Asia, the once-secret launch site of Sputnik and the first man in space lives on in a strange limbo, marooned in western Kazakhstan by the break-up of the Soviet Union in 1991.

Today it is the only gateway for manned flights to the International Space Station, hosting astronauts from the world, and the site of about one-third of all satellite launches.

But Baikonur has no movie theatre - let alone many of the trappings of the 21st century. Camels graze the barren steppes near rocket launch sites, and what little seems to have changed since Soviet times often looks the worse for it.

"Visitors expect a city of steel and glass like in science fiction films, but for a long time no one even knew this place existed," said Evelina Shchur, director of the space museum in a city she describes as "provincial".

Despite bigger budgets and Putin's pledge to revive the sector, Russia's space industry has been in crisis for years.

"The whole industry needs to be overhauled because the old doesn't work and the new hasn't been built," said Igor Marinin, editor of the spaceflight journal Novosti Kosmonavtiki.

By separating space agency Roskosmos from its contractors, the Kremlin hopes the reform will boost quality control and end a calamitous series of blunders like July's crash of a Proton rocket carrying a $200-million payload.

"We have big plans," the new Roskosmos chief, Oleg Ostapenko, told Reuters last month. "We will do everything possible to get rid of the black marks on our reputation."

The reform also aims to streamline production by uniting suppliers into a new state-run firm.

Roskosmos will be left in charge only of policy, research and ground infrastructure such as the Baikonur cosmodrome.

"It will be very difficult, but the Kremlin realizes it can't keep living the old way," said Sergey Pekhterev, head of Russian sat-com firm SetTelecom. "The latest Proton accident showed the inexplicable degree of degradation in the sector."

The United Rocket and Space Corporation is to be created by mid-April on the grounds of a space research institute, and officials say the restructuring will cost nothing extra. An experienced plant manager, the former head of car-maker Avtovaz, Igor Komarov, 49, has been tapped to lead it.

Critics of the plan say it will eliminate competition and that the shake-up may bring more confusion to the industry, but many insiders say reform is long overdue.

"The industry has been stagnant, it's been rotting, there were big problems, but now a path has been decided on to fix them," Marinin said.

While Russia is the world leader in space launches and Russian-built engines equip U.S. rockets, it holds less than 10 percent of the multi-billion dollar global space market.

Gone are the days of crimped budgets. Russia has more than doubled spending on space in the last three years to over $5 billion in 2013 - though still a fraction of NASA's budget.

Despite the cash, the industry is so inefficient it cannot deliver on orders, and funds are misused or even stolen. "The money is received but there is nothing to show for it," Marinin said.

A scathing report by the Russian Audit Chamber said the industry spends four times more than the global norm on satellites that are poor in quality and prone to accidents.

"Satellites are decades in the making with no hope of market returns," the state agency, which supervises the use of government finances, said in a July report.

Russia's lead in a global satellite launch industry estimated to be worth around $55 billion over the next decade is now also on the line.

Launch failures have driven up insurance costs and caused lengthy delays, giving a boost to launch rival Arianespace and helping newcomer SpaceX to enter the market.

Since 2010, botched launches have rendered useless or slashed the lifespan of 12 Russian satellites.

"Today the state of our orbital grouping is catastrophic," Yuri Koptev, a former space agency chief, told parliament on December 19. "We lag behind not only the United States and Europe but also China and India."

The Russian-made orbiters lofted in the late 1980s and 1990s had such poor electronics that some lasted no more than a year compared to 10 years for U.S. craft.

Russia meanwhile has lost a generation of experts who would be in management positions today but left the industry or the country after the Soviet collapse. Of 240,000 people employed by the sector, almost 90 percent are either older than 60 or younger than 30.

"There's trouble at all the factories - a whole layer of engineers is lost," Soviet cosmonaut Valery Ryumin, 73, said.

"It's the same at Roskosmos. There are no experts left there, only colonels and generals," he grumbled, in a dig at the selection of Roskosmos' last three heads from the military.

In Baikonur, a school tries to fire up students' interest in space at an early age with rocket modeling design classes and test flights in the yard. But it will be years before any become engineers.

The legendary space port's future itself is clouded. Russia has agreed to lease Baikonur from Kazakhstan until 2050, but it plans to move the majority of space launches to a new cosmodrome it is building in the Far East.

Russians have been leaving since the heyday of Soviet spending on space in the 1980s. Only 30 percent of the 70,000 residents are now Russian. On the edge of town, Kazakh migrants squat in apartment blocks vacated by space technicians.

"You'll be preparing to launch into space, running along this historic river, and there is a camel herder," said NASA astronaut Mike Fossum, recalling his preparations for launch aboard the Soyuz craft in 2011.

"We joke that it's not the end of the world but you can see it from here."